Making Sense of the Child Tax Credit

If you’re like me, your head is spinning from the constant changes coming out of Washington, especially as they pertain to our finances. A lot of this news is good, but it takes some time to get my head around it … and I’m a CPA. My goal is to help you wrap your head around today’s shifting tax laws and take steps to ensure you have the most positive outcomes possible.

Recently I shared some insights into the economic stimulus payments, and shortly after I shared that piece, a third stimulus payment went out as part of the American Rescue Plan of 2021(ARP).

Also part of the ARP is a major change to the Child Tax Credit, which some experts predict could have a massive impact on child poverty. But its details are somewhat complex, so I’ll try to break it down to the basics.

Here’s a basic overview of the ARP’s new Child Tax Credit:

  1. Starting with the tax year 2021, the Child Tax Credit increases from $2,000 to $3,600 for each child 5 and under, and $3,000 for each child 6 and up.
  2. The new law extends the credit to families with children who are 17. Previously, the credit only applied to children 16 or younger.
  3. This increase will NOT apply to your 2020 tax returns, which are due May 17 this year.
  4. The full credit amount is available to Americans whose adjusted gross income (AGI) is $75,000 for individuals filing singly, or $150,000 for marrieds filing jointly. Above those thresholds, the credit begins quickly phasing out.
  5. Half of the credit will be paid in direct cash installments paid directly to families (which comes to $300 per month for each child aged 0-5, or $250 per month for each child 6-17).
  6. These payments will be distributed each month over a period of six months, in the same way your stimulus payments were made, from July through December of 2021.
  7. The remaining half of the credit will be applied on your tax return for 2021.
  8. The new law makes the credit fully refundable, meaning that even if you owe no taxes, you can have this credit refunded to you as a payment from the IRS.
  9. It remains uncertain whether this will be a one-year-only credit or will remain a permanent fixture in the tax law.

Now to some of the more complicated details. Like anything pertaining to the IRS, the rules around the Child Tax Credit are not straightforward. Here are some things to keep in mind, particularly if your AGI is higher than these income thresholds or if your children are approaching ages 6 or 18.

The age cutoff goes by calendar year. This means that if your child turns 6 any time within the calendar year 2021 (even if it’s December 31!), your tax credit for that child drops from $3,600 to $3,000 for this year. This means your monthly payment from July through December will be $250. Same goes for kids who turn 18 this year — you don’t get the credit if your child turns 18 any time in 2021.

The credit phases out above the $75,000/$150,000 AGI threshold. Although the previous $2,000 credit remains a baseline credit offered to any household whose AGI falls below $400,000, the additional $1,000 that was added this year begins phasing out after your AGI exceeds the $75,000 threshold for individuals/$150,000 for marrieds filing jointly. The phaseout occurs at a rate of $50 per $1,000 above the threshold AGIs.

In other words, let’s say a married couple has one child, and their AGI is $160,000. This puts them $10,000 above the stated threshold for the credit. The credit reduction can be calculated as follows:

$160,000 AGI

-$150,000 Credit threshold

$10,000 overage

Dividing the overage by $1,000, which is the increment used in phasing out the credit, means you would multiply 10 by $50, to arrive at a credit reduction of $500. So this family would receive $3,100 for a child aged 0-5, or $2,500 for a child 6-17.

Obviously, according to this math, once you reach an AGI of $85,000 (individuals)/$170,000 (couples), you’re only eligible to receive the baseline $2,000 credit, with your direct cash payments being $167 per month and the remaining $998 being credited on your tax return.

The $2,000 baseline credit phases out once income exceeds $400,000. Once over this second threshold, the child credit starts phasing out at the rate of $50 per $1,000 of extra income. It is completely phased at incomes of $440,000 for a married couple and $240,000 for all other filing statuses).

Credits are based on your most recent tax return. Because the current deadline for filing your 2020 tax returns is now May 17, your most recent tax return on file might be 2019, or it might be 2020. That’s the income the IRS will use to arrive at your eligible payment amount.

What if your income changed significantly in 2020 or 2021? Good question. The short answer is that it’s unclear and dependent on your particular situation. At this point, I know that if your income grows to exceed the income thresholds in the second half of 2021, you may be required to repay some of your credit, but how this will be enforced remains unclear. Some may have to repay; some won’t.

If, on the other hand, your income drops significantly in 2021 from above to below the income thresholds, you should be able to receive the proper amount as a credit on next year’s return.

Finally, all this depends on the IRS meeting its deadline. That is to say that the federal government mandated the Child Tax Credit payments to begin in July, but the question remains whether the IRS actually can do it. As you might imagine, it’s a huge undertaking, and as I write this there are less than three months to make it happen. Know, however, that if any direct payments are not received, they will be applied as a credit on your tax return.

Navigating all this new information is tricky, and your unique situation may raise questions my team and I can answer for you. If you have concerns that you’re paying too little or too much during the tax year or would like to know more about how the new Child Tax Credit will affect you, schedule a mid-year tax meeting with us for this summer to make sure you’re on track.

It looks like blue skies ahead for us all — as always, I wish you the best this month!

-Ludmila

child tax credit

Filing Taxes Late? Start Here.

Filing Taxes Late? Start Here.

It’s a bit like that nightmare where you show up for class on the day of the final, and you realize you never came to class before now and you don’t know any of the stuff on the test.

You’ve missed the April 15 deadline to file your tax return. You feel like a deadbeat. You’re scared about the consequences and you feel like the only person in America who didn’t make the deadline.

Well, I’m here to tell you, you’re not. We see a lot of this at our office. People skulk in, their tails between their legs, embarrassed that they didn’t make the deadline and imagining outrageous consequences.

These aren’t criminals. They aren’t dishonest people. Many times, they’re simply afraid they can’t afford what they owe, so they wait until they can pull the money together.

Or they’re perfectionists who fall behind trying to get everything just right and miss the deadline. They’re late one year, then that snowballs into the next year, and then the next, and before they know it, they’re five years behind and too afraid to file because they think there’s no way to catch up. They’re terrified about drawing attention to themselves.

In fact, Forbes says that about 7 million Americans fail to file their income tax returns each year. You aren’t alone, and the good news is that it’s not as difficult as you might think to get back on track. But the worst thing you can do is nothing.

  1. Schedule a meeting. Send us an email or give us a call. No matter how bad you think it is or how embarrassed you feel, you should know that we’ve seen it all before and we’re not going to intimidate you or make you feel bad. Taking that first step to schedule an appointment will go a long way toward helping you to breathe easier. When you call us, we’ll let you know what to bring with you to get the process started. Don’t worry if you’re missing documents. After all, that might be the reason you were late. We have ways to find some of that information you may be missing.
  1. Expect to sign a power of attorney. Usually, this is the first step in the process. Signing over power of attorney to us enables us to do all the talking for you. That way we can get hold of information, update all the information the IRS needs, and speak with the necessary parties, all so you don’t have to. Plus, as experts, we know the right things to say and the right questions to ask.
  1. Plan to make a plan. At our meeting, we’ll formulate a plan to track down information, submit letters, file forms, and make payments. Don’t worry that you’ll have to pay everything at our meeting—if you owe something (which we won’t know until we meet with you), we can come up with a reasonable payment plan that works for you. The IRS realizes that something is better than nothing, so as long as you’re committed to making regular payments, you’re usually in good shape.

Throughout my experience as a CPA, one of the most rewarding things about my job has been working with clients who were so behind on their taxes that they thought they were beyond hope. This is because, after working with them and coming up with a plan to correct the situation, I’ve witnessed them gaining peace of mind. The transformation was almost physical.

At Ludmila CPA, we know being behind on your taxes can be scary and even emotional. It affects your quality of life. But we do care, and we’re in your corner. Contact us today, and let’s figure it out together.

Need More Time? Here’s How to File a Tax Extension

Need More Time?

Here’s How to File a Tax Extension

April 15 is just around the corner, and let’s face it: Some people simply won’t be ready and will need to file an extension.

Call us if you need an extension.In certain cases—for instance, you’re missing some of your essential tax documents, working overseas, or even dealing with a major crisis such as a death or illness—the IRS does allow you to file for an extension. If you file by April 15, it buys you time until October 15, 2019, to file your return and helps you avoid any late-filing or late-payment penalties.

But there are a lot of misconceptions out there about filing an extension, and the biggest one is that filing an extension means you don’t have to pay anything until October.

Let me be clear: Filing an extension does NOT mean you avoid paying anything owed this month. Even if you file for an extension, you will still have to calculate your estimated payment and send it to the IRS by April 15, 2019. Filing for an extension only extends your time to file the return and, if necessary, the final amount due.

If you think you’ll need an extension, contact us right away. We not only can file the extension paperwork (Form 4858) quickly for you, but we can easily create an estimate of what you may owe. We do this by determining what, if anything, may have changed for you from last year or ask for copies of your W2 and 1099 forms and devise an estimate based solely on that. And if you find that you simply aren’t prepared to send your amount owed right now, you still need to file an extension with a request to get on a payment plan. This will help you avoid any late-payment fees on any balance due which could be almost 10 times higher than if you do not file an extension.

Be aware that filing for an extension most often results in being granted the extension. But it’s not guaranteed. In some cases—for instance, your estimated payment seems way off or problematic—your request may be rejected. This is why it pays to have a CPA do this filing for you: We have the knowledge to produce an accurate estimate to help avoid such problems, and we can do it quickly, to meet the April 15 deadline.

Making Your Tax Payment

Whether you’re filing for an extension or simply need to send what your return says you owe by April 15, there are a few options for sending in your payment.

  1. We recommend using the direct pay ACH (Automatic Clearing House) option provided on the IRS website, because the IRS charges “convenience fees” to process a credit card, costing you more, and because this is a safe option to ensure your money arrives on time and securely.
  2. The second-best option for submitting payment is to provide your accountant with bank information, and he or she can make the payment for you when the extension or return is filed.
  3. The third option is tried and true—mailing a check—and involves having your accountant provide you with a voucher and mail-in instructions. There are always risks with mail, such as interception by would-be thieves or simple lost-in-the-mail problems. However, for some who wait until the last minute, popping a check in the mail on April 15 is allowed, as long as the postmark reads April 15.

Can’t pay the whole thing? That’s okay. Pay what you can and have your accountant submit a request for a payment plan when you file your return. Depending on your circumstances and paperwork, you may have to pay penalties or interest, but your accountant can provide you with the details on this. A payment plan gives you a predictable payment amount to build into your monthly budget and ensures you won’t be charged for lateness.

As a last resort, if you simply can’t pay anything, at least file for the extension. The interest is high for late payments, but the penalty for being short on your payment is .5 percent of the balance owed per month, while the penalty without an extension is 5 percent—a significant difference. It behooves you to file without the payment versus not filing anything and taking your chances.

Also, don’t forget your IRA contributions! April 15 is the deadline for making IRA or Health Savings Account contributions for the year 2018. We work with our clients to help you plan these contributions in advance so that this isn’t a surprise.

Make an appointment or contact us today to find out how we can help you now or in the coming year! And congratulations for making it through another tax season!

Tips for Personal Tax Prep – Making Tax Season Less Taxing

Tips for Personal Tax Prep

We understand. The whole idea of hauling that box of papers out of the closet, sorting through them to decide what’s important and what’s not, pestering people to collect whatever documents are missing (and not being quite sure what those might be), then heading to the accountant’s office with frazzled nerves as you fear the worst outcome … tax season is rarely anyone’s favorite time of year. Trust us, we get it. We Make Tax Season Less Taxing

For some folks, going to the accountant is like going to the dentist: You dread it enough that you only go when you absolutely have to, and you spend the whole time there with a sinking feeling that you’re about to find out something bad.

The problem with that approach is that there might be something that’s a tiny issue now, something that’s easily fixable with a few adjustments, but it could wind up being a major issue next year. Avoiding your CPA doesn’t prevent the issue; it just makes it worse. (Also like the dentist.)

At our offices, we tend to only see some clients when there’s a huge problem. Maybe a few years ago they thought it would be easier, less scary, to have their friends do their taxes. Then they wind up sitting in our office, terrified because they owe a $4,000 penalty to the IRS for gross income omission.

Had they made the small investment in a CPA, they would have benefitted from a knowledgeable expert spotting such an oversight early on and correcting the mistake—or, at the very least, helping them to anticipate and mitigate the consequences. Paying us for an hour of our time buys you peace of mind. And trust us, there’s nothing more valuable than that.

We’re firm believers in surrounding yourself with professionals. You shouldn’t diagnose your own illnesses, you shouldn’t fix your own electrical system, and you shouldn’t manage your own stock portfolio—not without experts in your corner. And you shouldn’t file your tax return without insight from a trained professional, either.

We also won’t need you to bring in that dreaded box. When you call us and schedule an appointment, we’ll let you know what things we’ll actually need from you—and it won’t be as much as you’d think. At our meeting, we’ll go through your document package together, and we’ll let you know if anything’s incomplete, doesn’t look right, or is missing. Don’t worry about being perfect; no one expects that. We’re in this together, and we know that you’re not an expert. We’ll talk you through what’s next and make filing your tax return as un-scary a process as possible.

Then comes the most important part of the meeting: planning next year. The more thought you put into next year’s tax filing, the more rewards you’ll reap. Next year, we will remind you it’s tax preparation time to help you collect the documents you’ll need and to schedule a meeting. And then we’ll debrief—what went well, and what didn’t? What changed for you? What adjustments should we make in response? What are your financial goals, and how can we help you reach them?

Are you convinced? The April 15 tax deadline is fast approaching, so contact us today to schedule an appointment or to discuss any concerns you may have. We’re ready to help you make tax season a whole lot less taxing.

Are you a small business owner? Check out our tax prep tips for your small business!

 

Tax Prep Tips for Your Business

The jury is still out on what impacts the 2018 tax cut package will have on businesses as they file their 2018 tax returns this spring. CPAs like us are bracing for the unexpected, and we’re urging our business clients to get all their ducks in a row as we move through tax season. If you’re a business owner, hopefully, you’ve sent out your W2s and 1099s and are preparing to file your returns.

Understanding the new laws and keeping the deadlines straight can be tricky, but here’s what you need to know to be as prepared as possible for tax time:

S-Corps, partnerships, and multiple-member LLCs must file returns (or extensions) by March 15. For LLCs, this deadline has only been in place for three years, and it may still not be a habit for many. But if you miss this deadline — whether you only miss it by one day or 30 — the penalty is $195 per month, per owner. There’s no prorating, so don’t miss that deadline. Can’t make the filing deadline? File an extension, which is available until September 16, but ONLY if you file for it by March 15. (Why September 16? Because the 15this a Sunday.)

Yes, tax day is actually April 15 this year. It’s been a while, thanks to a couple weekend day interruptions that forced Tax Day to fall later, but this year the day is April 15. Don’t miss it!

Tax Day is April 15, 2019

Business tax extensions are filed either electronically by tax preparers OR by mailing paper Form 7004. We prefer electronic filing because we receive a record of acceptance from the IRS, which is not the case with paper forms (unless you use certified mail with return receipt, which would be your next best option).

C-Corps, trusts, sole proprietorships, and single-member LLCs must file by April 15. Sole proprietorships file their returns on their individual Schedule C forms by the standard filing date for individuals. This is also the date on which you’d need to file for an extension in order to avoid penalties. The extension would give you until October 15.

If your fiscal year ends on a day other than December 31 … your filing deadline is the 15th of the 3rd month for S Corporations and LLCs’, 15th of the 4th month for C Corporations and 15th of the 5th month for Non-profits.

Single-owner LLCs and partnerships run by married couples are disregarded entities, which file Schedule C by April 15. This means that their businesses are not seen by the IRS as distinct from their owners. These types of businesses file their returns on their individual Schedule C forms by the standard filing date for individuals (April 15). As if things weren’t already confusing, we should point out that this applies to LLCs organized in community property states, such as Nevada and California. In some states, LLCs owned by married couples may have to file separate tax returns, so be sure to speak with us about the rules in your state.

Don’t wait until your appointment with us to prepare your records! In order for us to be most effective with our time, in order to help you forecast the next year and make informed recommendations, we would have had access to your records to review beforehand. For your part, come prepared with questions or issues you’d like to discuss, and, of course, bring all your relevant documents, including any 1099, 1099K or 1099 misc. forms.

Contact us today to schedule an appointment or to discuss any deadlines or requirements that may pertain to your business. Happy tax season!